Beating Bakkt, Ledgerx Is First To Launch ‘Physical’ Bitcoin Futures In Us (#GotBitcoin?)
Bitcoin derivatives provider LedgerX announced it has launched the first physically-settled bitcoin futures contracts in the U.S. Wednesday. Beating Bakkt, Ledgerx Is First To Launch ‘Physical’ Bitcoin Futures In Us (#GotBitcoin?)
The contracts, which pay traders out in bitcoin, rather than U.S. dollars, will be available to both institutional and retail investors.
Customers can deposit bitcoin, rather than dollars, when buying a contract.
LedgerX has beaten the Intercontinental Exchange’s Bakkt and TD Ameritrade-backed ErisX to the punch with its new offering.
Any U.S. resident with a government-issued I.D. can now trade futures contracts for real bitcoin.
Revealed exclusively to CoinDesk, LedgerX has officially launched the first physically-settled bitcoin futures contracts in the U.S., beating the Intercontinental Exchange’s Bakkt and TD Ameritrade-backed ErisX to the punch.
Perhaps more importantly, LedgerX is offering the new product to both institutional and retail investors, allowing anyone who can pass know-your-customer (KYC) processes to trade the contracts, not just institutional clients with millions in assets.
LedgerX CEO Paul Chou told CoinDesk that retail customers can trade the product using his company’s new Omni platform, which recently went live, while institutional clients can trade futures as with any of LedgerX’s other products.
While LedgerX is not the first bitcoin futures provider in the U.S., it is the first to offer physical futures, meaning customers receive the actual bitcoin they bet on when the contracts expire, rather than the cash equivalent.
Moreover, customers don’t need to put U.S. dollars in to bet on the product. Chou explained that traders can buy contracts using bitcoin.
“Not only are they delivered physically in the sense that our customers can get bitcoin after the futures expires, but also they can deposit bitcoin to trade in the first place,” he said. “Cash-settled is cash-in and cash-out, we’re bitcoin-in and bitcoin-out.”
He believes this is the first time that a regulated company is able to allow customers to deposit bitcoin as collateral for a contract.
Because of this, customers do not need to wait for bank transfers or on other limitations of the U.S. banking system to participate, he said.
“If you imagine somebody that deposits bitcoin, they would not have to use the U.S. banking system at all. That’s why physically-settled is very important,” he said. “I think [it’s] one of the most unique use cases for bitcoin, where you’re using cryptocurrencies as the only collateral.”
This is possible using the physically-settled contract, he said, adding:
“As a digital commodity, bitcoin trades 24/7/365 and our customers expect that from us, so if you trade Sunday night, the banking system did not have to be open.”
LedgerX revealed that it was looking to offer bitcoin futures in April, having filed with the U.S. Commodity Futures Trading Commission (CFTC) for the requisite licenses in November 2018.
The CFTC granted LedgerX a designated contract markets (DCM) license last month, giving the platform the final approval it needed (the company previously had derivatives clearing organization and swaps execution facility approvals through the CFTC).
The company, though formed in 2014, only began offering physically-settled bitcoin derivatives products in 2017. However, its options and swaps products have initially been geared toward institutional customers.
Since then, the company has been working to ensure that anybody could trade its products, Chou said.
“We’ve been involved in this business for the last six years and we have not only been getting institutions on board but we’ve spent a lot of time educating regulators on why this is important,” he said, adding:
“Cryptocurrencies are for everybody and we never started this looking to offer just to hedge funds or institutional clients.”
John Todaro, director of research at TradeBlock, told CoinDesk that physically-settled contracts allow traders to more appropriately hedge their bets, which may be beneficial for non-speculative institutions.
“Additionally, cash-settled futures contracts could potentially be more susceptible to manipulation depending on the formula, and underlying spot exchanges or indices used for settlement at expiry,” he said.
Normally, cash-settled contracts are also cheaper than physically-settled ones, as traditional commodities have delivery costs associated with them. These delivery costs likely disappear with digital assets, however, Todaro added.
“Given cash contracts are more simple relative to physical contracts, physical contracts would likely be more useful for an institution than retail,” he said.
Bitcoin futures have drawn attention in the U.S. since at least 2017, when CME and Cboe announced they were launching cash-settled contracts. While Cboe ended support for its product earlier this year, CME continues to enjoy sizeable trading volume.
TD Ameritrade, the giant online stock brokerage, also offers its clients access to CME’s futures contracts.
However, LedgerX is not necessarily competing with cash contracts, Chou said. For one thing, the two types of contracts “are entirely different.”
“Really we have a lot of folks who never even touch U.S. dollars,” he said. “Cash-settled is very different from what we do.”
This applies to Omni as well, he said. The platform “is really going to be a new product for retail that is going to be unique in that it’s going to be incredibly simple.”
“It’s going to make available to the retail public all sorts of ability to trade bitcoin, whether it’s spot, futures, options and we have a lot of things in the pipeline.”
(Unlike futures, swaps are not based on the asset itself, but rather its performance, while options are a non-binding contract.)
LedgerX is in good company. A number of companies are planning on offering physically-settled bitcoin futures in the U.S.
Bakkt, which was set up by the New York Stock Exchange’s parent firm to much acclaim last year and TD Ameritrade-backed ErisX have both announced their intention to enter the market.
Bakkt has self-certified its contracts through the CFTC, and is now waiting on a trust charter from the New York Department of Financial Services to set up its warehouse. Once the trust charter is approved, Bakkt will likely be able to launch within a few weeks.
The firm conducted user acceptance testing on July 22, ensuring that customers, clearing members and the provider were all able to communicate when trialing the contracts.
ErisX, like LedgerX, has received the necessary CFTC approvals, though it has not announced a timeline for launching its futures contracts. The company began offering a cryptocurrency spot trading market in April 2019.
CFTC Did Not Yet Approve LedgerX Physically-Settled Bitcoin Futures: Report
The United States Commodities Futures Trading Commission (CFTC) has confirmed that LedgerX has not yet been approved by the agency to offer physically-settled Bitcoin futures, in a statement obtained by CoinDesk.
Allegedly Fake CFTC Approval Announcements
As Cointelegraph reported yesterday, LedgerX said in an announced on July 31 that its physical futures offering was live on its Omni trading platform. However, the latest confirmation from the CFTC suggests that this could not have occurred.
Derivative specialist Thomas G. Thompson pointed out on Twitter that “the CFTC does not show any futures contracts certified by” the firm. He concludes that LedgerX may indeed have just launched their existing swaps on their new futures platform. Nevertheless, he concluded:
”Still important development because now retail can trade bitcoin options and swaps.”
Meanwhile, cryptocurrency news outlet The Block reported earlier today that numerous clues suggested that the launch, indeed, did not take place. The reporter quotes an anonymous industry leader commenting on the development:
“Don’t see any reported trade volume either. Vaporware launch.”
Nevertheless, the official LedgerX Twitter account announced today the launch of the LedgerX Omni, welcoming users to sign up for “early access.”
As Cointelegraph reported earlier this month, Bakkt, the long-awaited Bitcoin futures platform from the Intercontinental Exchange, has begun testing the delivery of BTC futures.
Cointelegraph reached out to the CFTC for comments but did not receive a reply at press time.
LedgerX Claims Ex-CFTC Chairman Stalled Approvals Due To Personal Bias
Cryptocurrency derivatives firm LedgerX alleges that former United States Commodity Futures Trading Commission (CFTC) chairman Christopher Giancarlo obstructed the approval of its amended Derivatives Clearing Organization (DCO) registration because of personal bias against the firm’s CEO Paul Chou.
As Industry news outlet Coindesk reported on Sept. 28, LedgerX made the allegations in two letters obtained via a Freedom of Information Act request. The first letter — dated July 3 — states:
“We have strong reason to believe that this unreasonable delay that is in clear violation of the Commodity Exchange Act is related to the Chairman’s animus towards a blog post written by our CEO.”
Per the report, while Giancarlo did not answer the outlet’s request for comment, Chou confirmed that the letters are real, accurate and are only some of the messages sent by the firm to the CFTC. LedgerX claims that in January Giancarlo called one of its board members, explaining:
“[Giancarlo] told him that he was going to make sure our DCO order was revoked within two weeks, due to a blog post written by myself the previous year implying that preferential treatment was being given to larger companies so he could ‘cement his legacy.’ This refers to the ICE / Bakkt approval, which was running into issues that were frustrating the chairman.”
While the topics in the letter are quoted, it is unclear which blog post exactly he refers to.
Auditors “Never Seen This Kind Of Thing Before”
Per the outlet’s report, LedgerX was asked by the CFTC to acquire insurance and conduct a SOC 1 Type 2 audit. Furthermore, the company claims that one of the CFTC staffers tried to interfere with LedgerX’s audit. The company also reportedly notes that some auditors were “saying they had never seen this kind of thing before.” Chou claims that he later received apologies:
“Previous chairman wanted to revoke LX license bc Bakkt efforts not moving along. Having no legitimate reason to revoke our license, staff resorted to contacting our independent auditors to tamper with audit to give commission reason to revoke license. Staff admitted & apologized.”
In the second letter, dated July 11, the firm also notes that its application has been pending for nearly 250 days — now it is over 300. Per the report, the CFTC has now has 180 days to approve or deny an application under federal laws.
Reliance On The Direct Competitor
The letters also note that the CFTC’s swap data repository requirements force LedgerX to report to the Intercontinental Exchange’s ICE Trade Vault, and the latter company has already launched its own competing service — Bakkt. In the July 3 letter, LedgerX claims to have an audio recording of a call with ICE, adding:
“Later, we have on voice recording, when ICE staffers thought they had muted their side, that they were instructed to delay support for our SDR reporting so that we could not start trading — something we consider incredibly anticompetitive. We filed a formal complaint regarding this anti-competitive aspect which was not answered at all. A division head later admitted, in person, to our COO that I was correct in stating that certain entities were being preferentially treated by the Chariman’s office.”
Lastly, Chou Also Told The Outlet That He Has Been Excluded From The Cftc’s Technology Advisory Committee. He Said:
“They didn’t tell me why but I think it’s pretty obvious why they did it. […] One of the issues they were going to talk about… was custody and LedgerX is essentially the only member that does custody right now so we were about to send Juthica.”
As Cointelegraph reported at the end of July, the CFTC has reportedly confirmed that LedgerX’s physically-settled bitcoin futures product has not yet been approved by the Commission.
CME Exec: No Plans For Physically Settled BTC Contracts
The Chicago Mercantile Exchange (CME) Group has no current plans to launch physically settled Bitcoin (BTC) contracts, a senior executive has said.
Tim McCourt, its global head of equity index and alternative investment products, told MarketsMedia on Oct. 1 that all new contracts or products are driven by customer demand.
CME’s New Options Will Be Settled In BTC Futures
CME has been trading BTC futures since December 2017 and recently revealed plans to launch options in the first quarter of 2020, pending regulatory review.
Its current Bitcoin futures contracts are settled in cash. McCourt said that “the number one demand from customers has been for options on our futures” since the launch of its futures product.
Since December 2017, there have been 20 successful futures expiration settlements, with more than 3,300 individual accounts trading the product. Year to date, a reported 7,000 CME Bitcoin futures contracts — equivalent to roughly 35,000 BTC — were traded on average each day, breaking a new all-time high this May.
Institutional Interest In Bitcoin Is Growing
McCourt noted that “institutional interest in Bitcoin is growing but they need time to become familiar with the market and get approval to use new products.”
Current participation is reportedly spread between hedge funds, commodity trading advisors and asset managers, as well as crypto-focused hedge funds and trading firms.
The planned forthcoming options will use CME Group’s existing technology, matching engine and clearing mechanisms, and the product is currently undergoing the group’s standard testing procedures.
Bakkt Launches Physically Settled Futures To Tepid Market
In late September, Intercontinental Exchange launched its much-anticipated, regulated platform Bakkt — offering physically settled BTC futures contracts and custodial services approved by the Commodity Futures Trading Commission.
Bakkt’s sluggish launch has been identified as a possible contributing factor to Bitcoin’s recent price weakness. In the days following Bakkt’s debut, BTC/USD plummeted from near $10,000 to under $8,000.
Bakkt chief operating officer Adam White earlier told reporters that the platform hoped its futures would aid price discovery in the long-term.
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